RBA figures show that the margin lending market rose slightly in the first quarter of 2013, but dipped again in Q2 and Q3 resulting in the total outstanding debt to fall to $11.8 billion in September 2013 (down 7% from $12.7 billion last year). Against this backdrop, the ninth annual Investment Trends Margin Lending Planner Report looks at the way forward for the industry. Key trends include:

Despite improved market outlook, 2013 saw more planners withdraw from margin lending advice

Planners’ average return expectation from the All Ordinaries for the next 12 months rose to 9% (excluding dividends), a three year high, in September 2013. In spite of having an improved market outlook, planners continued to withdraw from margin lending over the last year. The proportion of planners advising on margin lending fell from 55% in 2012 to 45% in 2013 and the total outstanding margin debt from the financial planner channel reduced to $4.4 billion in September 2013 (down 13% since December 2012).

However, in line with the improved market sentiment, the direct investor channel has begun to improve with an outstanding debt of $4.7 billion in September 2013 (up $480 million since December 2012).

It appears that the impact of regulatory reform has not yet finished playing out

One third of planners who still advise on margin lending say recent regulatory changes make advising on margin lending less attractive. 13% of current users said they might stop using margin loans as a result of recent regulatory changes, representing 1,000 planners at risk of exiting margin lending advice. Investment Trends Analyst S M Shahed says, “It is evident from our research that the impact of regulatory reform has not yet finished playing out. Further help from margin lenders with compliance and new licensing requirements is essential in order to stop the outflow in the planner channel.”

Remaining users intend to increase their margin lending activity over 2014

Among the planners who continue to recommend margin lending, intentions of writing new margin loans over the next 12 months rose versus the previous study, with 47% (up from 41%) intending to increase their use of margin lending. Improved conditions (interest rate, market, and client demand) would encourage an increase in their usage of margin lending for 77%, but there are many other things providers can do to help planners, such as simplifying processes and protected loans.

A push from planners could certainly help grow the margin lending market

“A push from planners could certainly help grow the margin lending market, as a large proportion of loans written by planners are new loans rather than a shift of clients between lenders,” said Shahed. Only one quarter of recent margin loans established by planners were replacement loans. In contrast, two thirds of the recent loans established by direct investors were replacement loans.

Pricing remains the main reason planners would switch lenders, but more than last year said they would switch for features

37% of planners say they would switch their main margin lender for lower interest rates (down from 47%). On average they would look for a reduction of 59 basis points in the interest rate for switching to a new lender. On the other hand, 29% of users (up from 20% last year) would switch their main margin lender for better features, citing on average eight different features. The most sought after features include margin call protection (51%) and early margin call warning (50%).

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Against this backdrop the eighth annual Investment Trends Margin Lending Investor Report looks at the way forward for the industry. Key trends included:

• The number of current margin lending investors may have bottomed, with a significant number of ‘next wave’ and ‘dormant’ investors intending to utilize margin lending over the next 12 months
• The number of active margin lending investors in Australia has declined to 95,000 in September 2012 from 119,000 in September 2011. Under the surface there were 6,000 new borrowers (compared to 9,000 in 2011) entering the margin lending market and 4,000 returned to borrowing having been dormant in the past. 30,000 stopped using margin lending.

Commenting on the research, Eric Blewitt, COO at Investment Trends said, “While there has been a downward trend in the number of current margin lending investors, a substantial pool of next wave borrowers looks very promising, rising significantly from 30,000 in 2011 to 57,000 in 2012.

“Not all of these potential borrowers will act on their intention. Historically, only a proportion of who said they intended to commence borrowing actually did so (24% in 2011 and 20% in 2012). If the conversion rate remained at 20%, 11,000 potential borrowers would be expected to commence margin lending over the next twelve months, compared to only 6,000 over the previous year.”

The number of dormant clients (who used margin lending in the past and stopped using it at some point) has increased from 18,000 in 2011 to 46,000 in 2012. 22% of the dormant borrowers became active in 2012. If this conversion rate remains the same, there will be an addition of 9,000 dormant clients returning to the pool of active margin lending investors over the next twelve months.

Among existing margin loan users, those planning to increase their use of margin lending outnumber those planning to decrease by two to one.

39% of current margin lending investors (compared to 33% last year) expected to increase their borrowing level over the next year. A further 41% (down from 46%) stated they expected to keep their level of borrowing the same, while 21% (same as last year) indicated that they would reduce their level of borrowing.

Investors, who are intending to increase their margin lending usage, mainly cited good buying opportunities (61%), undervalued assets (40%), and borrowing more as investments increase in value (40%) as reasons.

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Client notifications

Advisers may have clients who hold margin lending facilities.  If this is the case, these advisers may have obligations under the Corporations Act to notify their clients of margin calls.

As you are likely aware, lenders are obliged to take reasonable steps to notify a client with a margin loan as soon as practicable where that loan is subject to a margin call.  If the adviser has agreed with their client and the margin lender that margin loan notices will be given to the client by the adviser, the adviser must take reasonable steps to notify their client of margin calls as soon as practicable.  To enable this, the lender must take reasonable steps to notify the adviser of the margin call.  

Responsible lending

We are aware that during market downturns there can be pressure on lenders to extend margin lending limits and/or loan-to-value (LVRs) ratios to minimise margin calls on clients.  We remind lenders (and their agents) that the responsible lending requirements continue to apply, including to any limit increases.  Therefore, lenders need to take care to ensure that any changes to lending limits and LVRs are consistent with responsible lending practices.  

Generally

While this may not be directly applicable to advisers, your members may receive increased inquiries about clients’ margin loans and we remind advisers both of these responsible lending provisions and the requirements to ensure any advice is appropriate.  It is also important during this time to ensure that licensees’ internal dispute resolution arrangements are appropriately resourced and consumers are informed about their right to access external dispute resolution (as necessary).

For more information:

• ASIC’s website material on margin lending obligations at the following link:  http://www.asic.gov.au/asic/ASIC.NSF/byHeadline/Margin%20lending
• Part 7.8, Division 4A, of the Corporations Act. 

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